Calls have appeared for the government to double the tax-free allowance granted to savers as taxes collected from such accounts look set to almost double this year.
Thanks to higher interest rates, more people face being pushed over tax-free thresholds of £500 and £1,000 respectively in their cash savings accounts without being aware of the money they owe, according to AJ Bell.
Base interest of 5% will likely tip more people over tax-free allowances, the financial services firm said, following a near doubling in the number of account holders who were charged between 2021 and 2022.
Fewer than one million savers were liable to pay tax on savings accounts in 2021, compared to 1.8mln in 2022, prompting a near-200% rise in the amount the government was owed to £3.4bn.
AJ Bell anticipates tax payments on savings will hit £6.6bn this year, as a growing number of people see rising interest payments take them above their tax-free savings allowances.
“Nobody should be punished for holding a rainy day savings pot,” AJ Bell finance head Laura Suter commented.
“Rising rates and a frozen personal savings allowance means some individuals are being taxed despite having relatively modest pots of cash set aside for a rainy day.
“To add insult to injury, because inflation is so high, they aren’t even making a real return on their money – yet they are still being taxed.”
The bank subsequently called on chancellor Jeremy Hunt to end the freeze on personal savings allowances, with the cap having remained the same since 2016.
“Until a brown letter lands on their doormat some people won’t even realise they owe tax on cash interest,” Suter added, given many do not fill out self-assessment tax returns.